Polish transformation story of 1989 - Jeffrey Sachs lecture - Part III: Debt cancellation – the reform

Łódź, Poland, 6th of June, 2014 - Jeffrey Sachs lecture
co-organizer of the event: Zbigniew Galar

Part III: Debt cancellation – the reform

There was a meeting at the parliament, I was asked to speak, to give an idea about economic reform. You can imagine, it doesn’t get better than that in your life, to have that chance. And the US government was represented by Senator Robert Dole, who was the Senate majority leader in the Republican party this was the Bush senior presidency of course. Senator Dole spoke first and he said: “The American people want to congratulate Poland on becoming the first democracy in this region, in half a century and he was there to relay the wishes from President George Bush and to say that The United States would do “anything” to make Poland a success.”
So I thought: “OK. It’s my chance.”
So then they called me. I was a kid, I’d like to think it at the time – I was 34 and there was Senator Dole there and so I stood up and I greeted Poland and I said how thrilled I was and I said: “As Senator Dole just said America will do anything so I know that Senator Dole will agree with me – that Poland debts should be completely canceled! And I am sure the US government will help make this possible.”
And I turned to him and he had this very sickly smile on his face. He had walked into something and I was gone hold him to it. The next evening I met with prime minister Mazowiecki. He was a wonderful person, really a wonderful person, as you know, Poland was so lucky to have great people like this, in the leadership. He looked very pained by the way. He did not look like a happy person. He looked like a person carrying a huge burden.

He told me two things, that were notable. First, he said: “Mr. Sachs, people from Washington called me to say you are a very dangerous person.”
And I said: “What do you mean?”
“Well, your idea about debt. It’s not very much liked in Washington.”
And it wasn’t necessarily very much liked. I have a lot, by the way, good history on my side because this how real economic successes are made, by doing something unusual, like that. But the second thing he said was very interesting, right from the beginning, almost his first words to me were: “Mr. Sachs, am looking for my Ludwig Erhardt.”
And Ludwig Erhardt I'm sure… Does everybody know who that is? Who doesn’t know the name – just out of curiosity?

So Ludwig Erhardt was the German economy minister for fifteen years actually, from 1947 until 1963 and then he was briefly the prime minister after Adenauer – chancellor – sorry he was the chancellor after Adenauer. And in 1947, of course, Germany was in chaos. In a certain sense, it served them right, they have nearly destroyed the world but it was, of course, a horrible situation. People were hungry and there were massive shortages. The US was the occupying force, nobody knows what to do exactly. And Erhardt one day fried up all the price controls and let the prices start operating and the shortages went away immediately because supply and demand were operating. And that was considered even since the beginning of the German economic miracle of recovery from World War II and the development of the modern German autonomy. So Ludwig Erhardt was known as a radical reformer who started with the shock and started the take-off. I was very happy to hear that and because Ludwig Erhardt for me is an economics professor loomed very large as that kind of example of taking a dramatic action to get something started.

And then he asked me who it might be – I didn’t know – and then a couple of days later I heard name Leszek Balcerowicz for the first time and we arranged to meet and Leszek was definitely ready for very radical action and we had a long discussion and then many long discussions about strategy and tactics and I tell you one more story, just to give you the sense of this.

That was, I think prime minister Mazowiecki came at the office, something like August 26th, if I remember correctly, 1989. And The International Monetary Fund meets early in September each year, so this was an incredible thing because now Poland had a democratic government and Leszek Balcerowicz would go to represent Poland at The IMF. The IMF can really be a stupid institution by the way. Sometimes good, but at the moment it was a little bit stupid because it didn’t know what to do and it didn’t understand this was a historic breakthrough for this country. Even the head of the IMF for Poland said to me: “What’s the difference, it’s the same people, the same ministry of finance. We don’t trust these people.”
And I said: “Are you kidding? This is the biggest change in the world in 45 years. You better do something. You can’t just sit there. You have to now help.”

And to show you the, what the revolution is like, and how the time makes a difference. Leszek came to Washington, I came to Washington. I stayed in my junior deputy who had been a student of mine, at the time, his name: David Lipton. And he and I were with Mr. Kuron.
Now, by the way, David Lipton is the number two of the IMF, he is the deputy managing director, he’s a very senior, incredibly experienced, wonderful, he’s a fantastic person, but now he is a number two of the IMF but at the time he was my deputy. And so I was staying over at his house that night and I’ve got an idea – “OK, we’ve got the debts canceled even though nobody knows it jet and the currency needs to be convertible. That’s easy, all you have to do is let it be determined in the market but Poland didn’t just want a convertible currency that would collapse, it wanted a convertible currency that would be stable.”

And so the idea was to create a convertible currency that would be stable at the new exchange rate. For that, you needed some foreign exchange reserves but Poland had no foreign exchange reserves so Poland had no way to defend the currency.
So I thought, we need foreign exchange reserves, so I said: “We need a stabilization fund. We need to go raise money for the Stabilization Fund.”
So I called up Leszek that morning, in the first morning of the IMF, and I said: “Leszek – can I try to raise a billion dollars for you, today?”
And he said: “OK if you want. You think that is possible?”
I said: “I don’t know but I have an idea because you need currency Stabilization Fund.”

So at David Lipton's kitchen table, I typed up a memo: “Złoty Stabilization Fund and what should be done.”
And there is again a history for this because many historical cases had this kind of thing – from the twenties and from earlier – 50 years earlier. And I wrote it up and I called senator Dole because now I knew him as a good friend. We shared a platform together and he immediately said: “Come in.”
And I brought this memo – one-page memo and I said: “Senator Dole this is really how The United States can really help Poland. Poland needs one billion dollars to defend its currency. And The United States – I said – doesn’t even have to give the billion. Maybe the US gives 200 million, let the rest of the G7 give the other 800 million.”
He liked that idea a lot. So he said: “Can you come back in an hour?”
And I said: “Of course Senator.”

So we came back in an hour and who was there: general Brad Scowcroft. General Scowcroft was the National Security Advisor of President Bush. That’s the big deal for me.
Now there is the National Security Advisor and Senator said: “Explain to general Scowcroft your idea.”
And so I gave him the paper and he read it and he said: “Do you think this will work?”
And I said: “Yes, of course.”
Always be confident, definitely.
And I said: “Yes general, this will work.”
And he said: “Can you call at the end of the day?”
And at the end of the day, in eight hours, I called Senator Dole, and Senator Dole picked up the phone from his office and said: “You have your billion dollars. Tell your polish friends they have their billion dollars.”
And that’s how the Polish Złoty Stabilization Fund came to pass.

My idea was to help Poland get started. It wasn’t the defined the kind of society that Poland would have – no one in his right mind could do that or should do that. And I, at that time really, told myself a macroeconomist also, which means that I was an expert, more than relatively, certainly, because I didn’t do other, many other things that I do now, in finance and in macroeconomics and in helping to stabilize an economy that was in collapse. Of course, no one has ever stabilized a socialist economy, that was in collapse or made this transformation. So this was completely uncharted. No one knew what could really happen, it’s true. No one could be sure. What the question was – would the enterprises behave like enterprises or not – some did, some didn’t but, in general, most did. But this was not about the long-term vision of a free market economy for me. It was about getting started. To get out of the Soviet system into a market system, to become a part of the European economy.

Now my conclusion is, looking back 25 years, that this worked and it happened. I can’t give you all the reasons why – Poland did the best of every country in this region by every statistic I know. The economic growth was fastest, the recession was the shortest, the rise of the incomes was the highest, the foreign investment was the fastest. There was a lot of hardship but we don’t even have the tools to do everything so fine-tuned, nobody does. Especially in a context like that. So my conclusion is that was the right start.

Now, it happened over time, Leszek and I became very good friends. I admire him a lot because he was very tough and he was personally, physically a marathon runner and it was like a marathon and the pressures were tremendous. Every day. I didn’t live those pressures, he lived the pressures. I came every five or six weeks and I tried to make some help whenever I could and I fought like hell for a year to get the debt canceled. And of course, you know that about 60% of it was canceled in the end.
And at the time everybody said: “No” at the beginning.
And the head of the UK Treasury, the senior civil servant, told me: “Mr. Sachs it’s impossible. It will never happen.”
And by the way, when someone in the UK treasury tells you that, you feel like you talking to the empire for 300 years. They say it was such sophistication, they explain to you all the reasons – he was completely wrong. I was a kid also, at the time, and I told him he was wrong. But it was like the whole weight of making the argument, it wasn’t an easy argument to make and at the end, the Germans were the last ones to support that argument.

And I had an idea, that worked, that was the right idea actually in the end. Am sure other things mattered, but I printed out for Leszek “The 1953 – London Agreement”, it was called, that restructured and canceled a lot of the Nazi era debt, that was owned by The German government after World War II. Germany got a fresh start and it got the Marshall Plan and it got its debts canceled. And frankly, if there was one country in the world that was less deserving of a fresh start it was Germany. In history one of the most evil crimes of all of human history. And jet Germany got a fresh start. And it’s good that Germany gets a fresh start. And Leszek took that paper and handed it to Chancellor Kohl. And Chancellor Kohl was the historian and he said straight out: “You know, this is a good argument. This is right.”
And Germany came to agree, the last of all the major countries, that Poland should get the debt canceled.

A reporter asked me a couple days ago: “Mr. Sachs – you said all of it should be canceled and only 60% was canceled.” And I stared him in the eye and I said: “Are you kidding? Are you kidding? You do the best you can.”
And that turned out to be, I think, important and pretty good for Poland, so I was very proud of that, that was one of the biggest battles and not so easy and nobody quite believed it, in the beginning. They tried to run me out of Warsaw but prime minister Mazowiecki said: “You can stay and help.”
Even though he was told from Washington am a very dangerous person.

End of part III

To be continued...

Jeffrey Sachs

Transcript from the audio recording:
Zbigniew Galar

Lecture license: Creative Commons 2.0:
Jeffrey Sachs
Transcipt license: Creative Commons 2.0:
Zbigniew Galar

Audio and PDF transcript of the recording will be available under the last part.